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Andrew Left, head of Citron Research, joined Xueqiu’s investor community for a conversation his firm’s latest short, Qihoo 360 (NYSE: QIHU). Citron has released a series of four reports to-date, calling Qihoo a financial fraud and a terminal business.

Still Working on Qihoo ‘Fraud’ Story

Question: Since Qihu’s price has kept steady, does that show Citron’s short to have failed?

Citron: I do not like to comment on the short term movement of the stocks. My goal is not not move the stock in the first minutes, I believe my research will hold long term.

Question: Andrew, we’re all seen the ‘report card’. Citron has been wrong before. How confident are you on this one?

Citron: I am 100% confident.

Question: This year the price of a lot of China-listed companies declined sharply, such as renn, sina, cis, taom, ctrp, so you should have a lot of target to short. However, you missed those and just chose Qihu. After four rounds of reports, the price of Qihu has still kept steady. Does it means Citron don’t understand Chinese internet industry at all?

Citron: The stock market is not a day to day….I understand perfectly and believe I QIHU will trade below $10 sooner than later

Citron once again questions Qihoo’s directory site hao.360.cn and web games ARPU

Question: A little problem: do you really understand the advertising prices on hao.360.cn? Do you know why Baidu (BIDU) spent 50 million RMB 7 years ago to buy a website like hao.360.cn called hao123.com?

Citron: I believe the main premise being hao123 is to drive traffic to BIDU search, and make some money on the site. but search works and is the focus of bidu

Question: You still don’t understand the value of the links from your comment here, do you know the history of the link website in China?

Citron: I do understand the history and after reading all of the analysts reports on QIHU I understand that I know the business much better than they do

Question: After your 3rd report on QIHU, Mirae wrote, “Based on our channel check, Dangdang, 360BUY, Vancl, Letao, Dianping, Gome, and Amazon China all spent more than Rmb1m per month.” We know your opinion on Mirae. But did you also contact advertisers, and find them to be paying far less on average?

Citron: I would be interested in seeing that report from Mirae that would have to be from today…I find that hard to believe strictly looking at DANG quarter filings and their marketing spend.

Question: What’s your point of view about Qihoo’s web game business as Qihoo claimed its ARPU is RMB380?

Citron: I think that number is not true and will prove it in future reports.

Question: Did Citron consider the vast differences in ARPU between web games, MMOs, and social games?

Citron: Of course I studied the difference, go look at RENN games, they are NOT social games it is a direct comparison…I will prove games in another report.

“Free” is not a Business

Question: You said the reason why you short Qihoo is that Qihoo’s software is not their business. However, do you know Tencent (HK0700)? They offer QQ as a free software and reach a big business, so do you think Tencent is also a fraud?

Citron: It is not a big business, could be an initiative but a business cannot have the word free in it.

Question: I am not sure whether you do know the underlying business model of QIHU indeed. Actually, its competitor is BIDU, by selling traffic. It also can gain much revenue from web games as it grows because the growth and revenue fully depends on the browser users installed. So…you probably should re-hire your partner in China

Citron: I know what I read in the filings, qihu is one company that if you ask 5 people what they do you get 6 answers.

Question: Just to ask you, do you really know who are the main competitors to Qihu?

Citron: YES…..even though they give away free anti virus software currently most of their revenue is generated from their web directory. As for the future. show me don’t tell me.

Communication with Qihoo Management

Question: Did you discuss your conclusions with Qihoo’s management team before you decided to publish your report and did you make any effort to try to understand the differences? For the record of Citron has, it’s more like a tactic to make quick money. And in the recent report, you call Qihoo is a fraud, it’s a serious allegation, do you have any solid evidence backup your allegation?

Citron: I should not have to contact management. It is a public company and I should be able to read everything in the SEC filings or by reading the analysts reports. It was UBS that agreed that there are 60 paid links…NO ONE ever said anything different until yesterday.

Question: Could you show some references or assumptions regarding the valuation model you guys made which shows Qihu’s market value to be only $575 million?

Citron: We actually believe less than $575 million. They are probably worth their cash plus whatever liability exists in restating financials. After seeing what happened to Longtop and Sino Forest, how do investors know that shareholders will get anything?

Question: Andrew, I must say I chuckled at your whitty CAPS and duhs. Good attempt at sarcasm in many of your responses to Alex Hu and the rest of the bullseyes. Is this a tradition? Are all of your reports written this way? Fraud Busters, Citron.